THE COST OF LOW FERTILITY IN EUROPE

July 15, 2009

As in many parts of the world, Europe has seen a rapid decline in fertility. In the long run, low rates of fertility are associated with diminished economic growth, according to a new study by the National Bureau of Economic Research.

In "The Cost of Low Fertility in Europe," the researchers observe that in the short term, low fertility rates raise per capita income by lowering families' costs of child-rearing and boosting the share of working-age people. But as that working-age population moves into retirement, the number of workers who replace them will shrink. So, whatever short-term boon European nations may have gained from low youth dependency will be overwhelmed eventually by the economic burdens of old-age dependency.

If fertility rates stay at current levels and life expectancy averages 80 years, this study implies that Europe's share of working-age people will fall from about 70 percent today to somewhere between 50 and 55 percent in the long run.

That would suggest a 25 percent drop in the number of workers per capita, assuming that labor participation rates stay the same.

There are several ways to analyze the effects of fertility on economic growth -- the researchers choose to concentrate on age structure. The idea is that fertility, mortality, and net migration together determine the size of a nation's working-age population. The bigger is that group relative to the total population, the more workers there are, and thus the more income the nation is likely to generate. The smaller is that working-age group relative to total population, the smaller is output per capita in equilibrium.

Of course, small changes in any one of several variables can alter the picture dramatically:

In France, for example, where life expectancy is 80, the fertility rate that would maximize the working-age share of France's population would be 2.1 if young people started working at age 20 and retired at age 60.

With retirement at age 55, the working-age share-maximizing fertility rate would have to rise to 3.1.

With retirement delayed until 70, that rate would drop to two.

The same dynamic works at the other end of the working-age spectrum:

If young people entered the workforce at age 15, the fertility rate necessary to keep everything in balance would rise to 2.6.

If they entered at 25, then fertility only would need to be at 1.8 (below replacement level) to maximize the working-age share of the population.

Source: Laurent Belsie, "The Cost of Low Fertility in Europe," NBER Digest, July 2009; based upon: David E. Bloom et al., "The Cost of Low Fertility in Europe," National Bureau of Economic Research, Working Paper No. 14820, March 2009.